Pharmaceuticals: Background

Industry Composition:

The pharmaceuticals industry consists of drug manufacturers, biotechnology companies and the distribution and wholesale companies that handle the products produced. This industry is primarily focused on medicinal and veterinary chemical and biological compounds. Companies making related products, such as vitamins, other health supplements, or diagnostic substances, are also included. The majority of the revenues in the industry come from drug companies who make prescription, generic, and over-the-counter drugs for medical or veterinary use. Biotechnology companies differ from traditional drug companies in that their work consists of using biological knowledge to manipulate living cells, either from animal or plant sources. Biotechnology companies also focus on research to a greater extent than drug companies.

Compared to other industries, the pharmaceuticals industry boasts a relatively high percent of funds spent on extensive Research & Development (R&D) and is one of the largest employers of scientists. The next step is screening: testing the drug first on bacteria cultures and then on animals. Finally, clinical trials are performed where the drug is tested on humans. All that remains is the approval to produce the drug.


The use of medicine or drugs dates back as far as the Medieval Ages where there are records of earlier peoples using herbs and other plants for their supposed healing properties. Some of these plants actually did have legitimate healing properties and are still used today.

The modern pharmaceutical industry can be traced back to the discoveries of insulin and penicillin in the early 20th century. These products began to be mass manufactured, particularly in European countries, with other developed countries following close behind. The implementation of scientific processes to the research and discovery of new medicines has led to the industry as it exists today, with companies constantly searching for new products that heal, prevent, and cure consumers.


The leading companies in this industry are referred to as “Big Pharma” and generate more than fifty percent of the industry’s sales. The majority of these companies are headquartered in the United States, United Kingdom, Switzerland, Germany, and France. Pharmaceutical leaders include diversified companies such as Johnson & Johnson and Abbott Laboratories in the United States; Bayer in Germany; GlasoSmithKline in the United Kingdom; and non-diversified companies such as Pfizer and Merck in the United States; Novartis in Switzerland; and Sanofi-Aventis in France. Amgen is the biggest seller among biotech companies.

The remainder of the industry is very fragmented, with many specialty companies, small biotech companies, and other start-up companies that concentrate on a specific product. These companies are often bought up by Big Pharma before they can become a threat.


One problem with the steady growth of this industry is that all growth requires investment. Investment requires capital and, in order to make up the difference, the companies increase prices of their products. With investments in R&D in pharmaceuticals and biotechnology increasing every day, the prices are increasing as well. These price increases are so fast that some speculate that unless there is regulation, only the wealthy will be able to afford medicine. This is primarily a United States phenomenon, as most of the European countries, as well as other countries with pharmaceutical industries existing in them, have governmental regulations in place.

Because of the large costs of drug innovation and the complexities of the regulatory and approval process a new trend of Big Pharma teaming with smaller pharmaceuticals has become more pronounced. Small startups often have the right idea and scientists to do the work, but then have trouble raising the necessary capital to complete intensive research. Additionally, they often are not experienced enough to navigate the complex approval process and regulatory environment effectively. Big Pharma on the other hand has trouble finding new ideas and constantly innovating. When the two team up, the synergies they create are profound, with the capital and experience of Big Pharma, startups can bring the drugs to market quickly, efficiently, and cheaply, while Big Pharma has more access to potential blockbuster drugs in return.

The need for more small pharmaceuticals has created another trend, the focus of less developed countries forming their own pharmaceutical and biotech industries; also, the exportation of research to these countries. Taiwan, India, China, South Korea, and Singapore are all notable nations when dealing with this trend. The government of Singapore has already devoted a large city zone, buildings, and other incentives to bring more biotechnology to the country. This area, Biopolis, is already home to over 1000 researchers from 18 different nations.

Recently, investigations and prosecutions regarding global compliance violations have resulted in financial judgments against leading pharmaceutical companies and criminal convictions, particularly in United States, Indonesia, China, and Poland. Expanding regulatory forces are driving an urgent need for pharmaceutical companies to develop practical and effective solutions for meeting the challenges of integrating governance, risk, and compliances on a global level.

As with many industries, technology is a major driver. For pharmaceuticals, technology is just about everything. Recently, the newest technological trends have been with the research and use of stem cells, and the introduction of nanotechnology as a complement to drugs in healing patients.

Patent expiration is a major issue for some companies as their principal product becomes available generically, which in turn cuts profits. In relatively strong markets such as China and India, multinational pharmaceuticals companies require and expect intellectual property rights to be strictly enforced, when often they are not. There, countless local manufacturers are able to produce cheap counterfeit copies of patented drugs, which often make their way to Western markets. Implementation of intellectual property rights is improving.

Future Outlook:

The chemicals and drugs industry has a promising future. With an aging population consuming three times as many drugs as younger people, demand is expected to rise and opportunities to increase. Drug spending is expected to triple from 2000 to 2050. In the United States, the pharmaceuticals industry is the fifth most profitable and it continues to grow, albeit more slowly; it is one of the most profitable industries worldwide. The United States market has a very uncertain future due to potential consequences of political regulation. Aside from the established North American and Western European markets, many international markets including Brazil, China, India, and Turkey are promising substantial growth.

Many new drugs are expected to be developed in the coming years. Advances in technology and the knowledge of how cells work will allow pharmaceutical and medicine manufacturing makers to become more efficient in the drug discovery process. Further, there is a direct relationship between gene discovery and identification of new drugs- the more genes identified the more paths available for drug discovery. New genetic technology is being explored to develop vaccines to prevent or treat diseases that have eluded traditional vaccines such as AIDS, malaria, tuberculosis, and cervical cancer. Vaccines are also rising in demand which will help to keep up the industry’s profits.